February 2017, Auto Dealer Today - Feature
Maybe I flatter myself, but I think there’s a chance that someone at the Consumer Financial Protection Bureau might finally have read one of my articles ranting about the CFPB’s constant, annoying and erroneous use of the term “loan” to include retail installment contracts. In an undated Q&A posting that I think is recent, the CFPB tried to set the record straight, as follows:
“What is a retail installment sales contract or agreement? Is this a loan? A retail installment sales contract agreement is slightly different from a loan. Both are ways for you to obtain a vehicle by agreeing to make payments over time. In both, you are generally bound to the agreement after signing.
A loan is a transaction between you and a bank or other lender for money, where you use the money to purchase a vehicle and agree to repay the loan balance plus interest. A retail installment sale, on the other hand, is a transaction between you and the dealer to purchase a vehicle where you agree to pay the dealer over time, paying both the value of the vehicle plus interest. A dealer could sell the retail installment sales contract to a lender or other party.”
The posting concludes with a “tip” that states, in part, “With a retail installment sales contract, you may have additional rights under your state’s law (for example, the ability to stop making payments to the dealer) if there is a defect in your vehicle.”
If this were a test answer discussion by a law school student, I’d give it maybe a “D.” It would rate an “F” but for the fact that I tend to award effort, and this is one of the very few times that the CFPB has bothered to distinguish between a loan transaction and a retail installment contract (RIC).
What’s wrong with the answer, you ask?
There is plenty to criticize. First, a RIC is more than “slightly” different from a loan. The laws governing the two transactions are, in many states, completely different. Different maximum finance charge rates, different late charges, different NSF charges, different permitted events of default, different creditor and consumer rights upon default — these are way more than “slight” differences.
And lenders are often depository institutions, such as banks and credit unions. These institutions often have a number of relationships with those who borrow from them. A borrower might have a savings account, a checking account, car loans and other loans with the institution. That’s why the loan documents used by these lenders often contain rights to “set off” the borrower’s debt against savings and checking accounts.
Unlike the companies that buy RICs from car dealers, direct lenders frequently have more than one outstanding extension of credit to a borrower. That explains why there are frequently provisions in direct lending loan documents that provide that a default on one loan is a default under other loans, and provide that the collateral securing one loan serves as collateral for other loans. You won’t find those sorts of provisions in very many RICs. These are more than “slight” differences.
The dealer doesn’t sell the RIC to a “lender.” The dealer either holds it and collects the payments from the buyer or sells it to a bank, a credit union or a finance company. When such an entity buys the RIC, it is not engaged in lending. The buyer of the RIC is engaging in a commercial transaction in which it is purchasing an asset owned by the dealership. Nobody is lending anything to anyone.
The “tip” is simply puzzling. It seems to refer to the right of a buyer under a RIC to assert against the holder of a RIC any claims and defenses the buyer might have against the dealer. Such a right appears in the RIC and in some loan documents by virtue of a Federal Trade Commission regulation, and not because state laws that regulate RICs provide for such a right. It is true that car buyers have rights under Article 2 of the Uniform Commercial Code, but those rights apply regardless of the means of financing the vehicle, and even apply in cash deals. I am not aware of a right under state laws regulating RICs for a buyer to stop making payments when there is a defect in the vehicle.
But the CFPB’s real failing — now that is has acknowledged that all auto credit transactions are not “loans” — arises from all the times it has erroneously conflated the two transactions. There are references in scads of CFPB releases and throughout its website to “auto loans” when it is beyond clear that the term includes RICs. How is a consumer to know that all those references are misleading, sometimes seriously enough to steer the consumer into erroneous conclusions and bad decisions?
Thomas B. Hudson is a partner in the firm of Hudson Cook LLP, publisher of Spot Delivery, and the author of several widely read compliance manuals. Contact him at firstname.lastname@example.org.